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Introduction

Options are one of the most powerful money making asset classes ever devised. Yet they were not devised as a money making tool. Rather, their “purpose for being” is to limit portfolio risk. Whether you are talking about a portfolio of one stock, a hundred stocks, stocks mixed with commodities, or a myriad of other combinations, options can be used to either enhance your portfolio’s return on capital, take advantage of leverage to enhance yield, or limit your risk by exchanging a bit of profit potential for the “insurance” a long option provides. But if you are looking to buy an option to limit your risk, someone has to be on the other side of the trade. In years past, the other side of the trade was usually taken by professional options traders. The professional options trader was a mythical creature who made thousands of dollars every day by “picking the pocket” of the poor individual investor. I want to emphasize the word mythical. The professional options trader was merely someone who understood that options trading is nothing more than an exercise in simple probability theory. And this probability theory is easy enough to learn; with a bit of time and effort, most people can master it and use it for their own benefit. Furthermore, today options markets are, for the most part, so efficient that you can trade either side of a narrowly quoted market. Thus, there is no one out there picking anyone’s pockets. Options provide the fairest, most level playing field ...

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